New rules could harm community banks

Friday

Nov 30, 2012 at 12:01 AMNov 30, 2012 at 3:21 AM

New banking rules designed to prevent a future financial crisis like the one that occurred in 2008 were debated in the House’s Financial Services Committee on Thursday – with state regulators warning that the new rules could harm community banks.

Corey Kane

New banking rules designed to prevent a financial crisis like the one that occurred in 2008 were debated in the House’s Financial Services Committee on Thursday – with state regulators warning that the new rules could harm community banks.

But George French, director of the Federal Deposit Insurance Corp.’s Division of Risk Management Supervision, told the committee that the core elements of the new rules – such as requiring banks to hold more capital – would strengthen these institutions, with most of the provisions affecting only large, international banks.

French, who testified along with officials from the Federal Reserve and the comptroller of the currency, said he wanted to work with the committee before making changes.

“These are proposed rules, not final rules, and we anticipate making changes based on comments,” French said.

The new rules were drafted at a G20 meeting in 2010, as a response to the financial collapse in 2008. The G20 consists of finance ministers and central bank governors from 20 of the world’s major economies.

The new rules demand that banks worldwide increase capital reserves from 2 percent to 7 percent of assets in order to buffer against losses, such as defaulting home mortgages. The rules also include plans to perform “stress tests” on bank lending to corporations, and increase the transparency of bank balance-sheet information. The rules are slated to begin kicking in at the beginning of next year, and become fully implemented by January 2019.

U.S. Rep. Stephen Lynch, D-South Boston, who serves on the Financial Services panel, voiced his support for the new rules. Lynch said it was logical that banks must hold a level of capital based on the level of risk they are taking.

Although not a member of the committee, U.S. Rep. Ed Perlmutter, D-Col., joined the hearing to voice his concern about the new rules.

Perlmutter contended that the rules were overly complex and would not improve the behavior of large international banks. He also said that, even with his personal experience reading spreadsheets as a lawyer working on taxes and businesses, he could not fully grasp some of the rules.

“It obscures the ability for a regulator to see what a bank is worth,” Perlmutter said.